Synthetic Long & Short Positions
Learn to create synthetic stock positions using options. Gain all benefits of stock ownership with less capital and more flexibility.
What is Synthetic Long & Short Positions?
Synthetic Long & Short Positions is a position created using options that replicates owning (or shorting) stock. A synthetic long = buy call + sell put at same strike. Synthetic short = sell call + buy put.
Synthetics have identical P&L to owning stock but require less capital and can be rolled for adjustments. They're used for capital efficiency and tax strategies.
TL;DR - Quick Summary
Synthetic Long = Buy ATM call + Sell ATM put = Own stock equivalent. Synthetic Short = Sell call + Buy put = Short stock equivalent. Same P&L as stock but with 50-80% less capital. Used for leverage, margin efficiency, and conversion/reversal arbitrage.
What is a Synthetic Long Stock Position?
A synthetic long stock position is an options strategy that replicates owning 100 shares of stock using options instead of buying the actual stock. You create this by buying a call and selling a put at the same strike price and expiration.
The position behaves almost identically to owning stock—you profit dollar-for-dollar when the stock goes up and lose dollar-for-dollar when it goes down. The delta is approximately +100, just like owning 100 shares.
Traders use synthetic longs for capital efficiency, margin benefits, tax strategies, or to replicate stock ownership in accounts with restrictions. It's particularly powerful when combined with other strategies or in portfolio management.
Key Characteristics
- ✓ Delta of ~+100—behaves like owning 100 shares of stock
- ✓ Capital efficient—requires less capital than buying stock
- ✓ Same risk/reward as stock ownership (1:1 movement)
- ✓ Buy call + sell put at same strike and expiration
- ✓ Can be established for credit or debit depending on interest rates and dividends
When to Use a Synthetic Long
1. Capital Efficiency
You want stock exposure but don't have (or don't want to tie up) the full capital required to buy 100 shares. Synthetic longs typically require 20-40% of the capital.
Example: Stock at $500/share ($50,000 for 100 shares) vs. $15,000 margin requirement for synthetic long.
2. Hard-to-Borrow Stocks
The stock is difficult or expensive to borrow for short selling, or your broker doesn't have shares available. Synthetic positions don't require borrowing actual shares.
Example: Recently IPO'd stock with limited float and high borrow costs.
3. Tax Considerations
Options can offer different tax treatment than stock. Synthetic longs using Section 1256 options (index options) may qualify for favorable 60/40 tax treatment.
Example: SPX options for S&P 500 exposure with better tax treatment than SPY shares.
4. Selling Covered Calls Without Owning Stock
Use a synthetic long as the "stock" component to sell covered calls against. This allows covered call strategies without the full capital requirement of buying stock.
Example: Synthetic long + short call = covered call position with less capital.
5. Account Restrictions
Your account doesn't allow stock purchases (certain IRA types, restricted accounts) but does allow options. Synthetic positions provide stock-like exposure.
Example: Cash-secured accounts that can't buy on margin but can trade options.
6. Avoiding Dividends
You want stock exposure but want to avoid dividend payments (or dividend tax implications). Synthetic longs don't receive dividends, which is reflected in the pricing.
Example: Avoiding taxable dividend income while maintaining bullish exposure.
How to Set Up a Synthetic Long
Basic Example
Let's create a synthetic long position on a stock trading at $100 using at-the-money options:
| Position | Strike | Type | Premium | Delta |
|---|---|---|---|---|
| Buy 1 | $100 | Call | -$6.50 | +50 |
| Sell 1 | $100 | Put | +$6.00 | +50 |
| Net Debit | -$0.50 ($50) | ~+100 | ||
The small debit ($50 in this example) represents the interest rate and dividend effects. In a high interest rate environment, you might actually receive a credit to establish this position.
Position Greeks
- • Delta: ~+100 (exactly like owning 100 shares of stock)
- • Gamma: Near zero (deltas don't change much with price movement)
- • Theta: Near zero (call theta offsets put theta)
- • Vega: Near zero (call vega offsets put vega)
Strike Selection
- ✓ At-the-money (ATM): Most common—strike closest to current stock price
- ✓ Same strike required: Both call and put must be at the same strike
- ✓ Same expiration required: Call and put must expire on same date
- ✓ Longer expirations: Less frequent rolling, more capital efficient
Comparison to Buying Stock
| Aspect | Buying Stock | Synthetic Long |
|---|---|---|
| Capital required | $10,000 (100 shares @ $100) | ~$2,000-4,000 (margin requirement) |
| Profit/loss | $1 per $1 stock move | $1 per $1 stock move |
| Dividends | Receive dividends | No dividends (priced into options) |
| Expiration | No expiration | Must roll at expiration |
| Voting rights | Yes | No |
| Assignment risk | None | Yes (short put can be assigned) |
Profit & Loss Scenarios
The synthetic long moves dollar-for-dollar with the underlying stock, just like owning shares.
Scenario 1: Stock Rises to $110
10-point move higher
- • Long $100 call: +$10.00 (ITM by $10)
- • Short $100 put: expires worthless, keep +$6.00
- • Original cost: -$6.50
- • Net profit: +$9.50 per share ≈ $950
Result: Approximately $10 profit per $10 move, matching stock ownership (minus small initial cost).
Scenario 2: Stock Stays at $100
No movement
- • Long $100 call: expires worthless, lose -$6.50
- • Short $100 put: expires worthless, keep +$6.00
- • Net loss: -$0.50 per share = -$50
Result: Small loss from initial cost if stock doesn't move. This is the interest rate/dividend component.
Scenario 3: Stock Drops to $90
10-point move lower
- • Long $100 call: expires worthless, lose -$6.50
- • Short $100 put: -$10.00 loss (ITM by $10), offset by premium received +$6.00
- • Net loss: -$10.50 per share ≈ -$1,050
Result: Approximately $10 loss per $10 move down, matching stock ownership downside (plus small initial cost).
Scenario 4: Large Drop (Assignment)
Stock at $80 (deep ITM put)
- • High probability of early assignment on short put
- • You'll be assigned and forced to buy 100 shares at $100
- • Now own stock at $100 while market is at $80
- • Unrealized loss: -$20 per share = -$2,000 (plus original cost)
Result: Assignment converts synthetic position to actual stock ownership—still have downside exposure.
Risk Profile Summary
- • Max profit: Unlimited (just like owning stock)
- • Max loss: Stock goes to zero (same as owning stock)
- • Breakeven: Current stock price + net debit paid (or - net credit received)
- • 1:1 movement: Position value changes $100 for every $1 stock move
Managing a Synthetic Long Position
1. Roll Before Expiration
At 30-45 DTE, roll the entire position to a later expiration to maintain your long exposure. Close both legs and reopen at the next expiration cycle.
2. Convert to Stock if Assigned
If your short put is assigned, you now own stock at the strike price. Keep the stock, or close the long call and manage the stock position as you would normally.
3. Sell Calls Against Position (Covered Calls)
Use the synthetic long as the base for selling covered calls. This creates a "synthetic covered call" with less capital than traditional covered calls.
4. Close When Thesis Changes
If your bullish thesis no longer holds, close both legs simultaneously. Don't just close one side—you'll be left with a naked call or put.
5. Monitor Dividend Risk
Before ex-dividend dates, deep ITM puts have high assignment risk. Consider closing and reopening after the dividend date, or be prepared for early assignment.
⚠️ Assignment Risk
The short put can be assigned at any time, especially if deep in-the-money. Assignment forces you to buy 100 shares at the strike price.
Always maintain sufficient capital in your account to handle assignment, or close the position before it becomes deep ITM.
Advanced Uses of Synthetic Longs
1. Synthetic Covered Call
Synthetic long (buy call + sell put) + sell higher call = covered call with significantly less capital. This is called a "poor man's covered call" when using LEAPS.
2. Pairs Trading
Go synthetic long on one stock and synthetic short on another for market-neutral pairs trading. More capital efficient than owning and shorting actual shares.
3. Tax Loss Harvesting
If holding stock at a loss, sell the stock for tax purposes and immediately establish a synthetic long to maintain exposure without triggering wash sale rules (consult tax advisor).
4. Interest Rate Arbitrage
In high interest rate environments, synthetic longs can be established for a credit due to put-call parity. This creates "free" stock exposure while earning interest on cash.
5. Protecting Gains Without Selling
Hold large stock position with unrealized gains—sell stock and go synthetic long to defer taxes while maintaining upside exposure.
Common Mistakes to Avoid
1. Not Understanding Assignment Risk
Many traders are surprised when their short put is assigned. Always maintain capital to handle assignment, especially around ex-dividend dates.
2. Closing Only One Leg
Never close just the call or just the put. You'll be left with a naked option with undefined risk. Always close both legs together.
3. Forgetting About Dividends
Synthetic longs don't receive dividends, and this is priced into the options. Don't assume you'll get the same total return as owning stock.
4. Ignoring Expiration
Unlike stock, synthetics expire. Don't forget to roll your position before expiration if you want to maintain exposure.
5. Using Wrong Strikes/Expirations
Both legs must be at the same strike and expiration. Using different strikes or dates creates a different strategy entirely.
Key Takeaways
- ✓ Replicates owning 100 shares using buy call + sell put at same strike
- ✓ Delta of ~+100—moves dollar-for-dollar with stock
- ✓ Capital efficient—requires 20-40% of stock purchase capital
- ✓ Same upside and downside as owning stock
- ✓ No dividends received—priced into option premiums
- ✓ Assignment risk on short put—maintain capital to handle it
- ✓ Must roll at expiration to maintain exposure
- ✓ Always close both legs together—never just one side
- ✓ Useful for covered calls without full stock capital
- ✓ Advanced strategy—understand options mechanics before trading
Start Trading Synthetic Longs
Use ApexVol's professional tools to analyze, build, and manage synthetic stock positions. Calculate margin requirements, visualize P&L, and compare to actual stock ownership.
Related Options Strategies
Covered Call
Synthetic long + covered call = covered combo.
Protective Put
Owning stock with downside protection.
Understanding related strategies helps you choose the best approach for your market outlook and risk tolerance. Each strategy has unique characteristics that make it suitable for different market conditions.